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In times of stock market turbulence and economic uncertainty, investors often seek the stability of precious metals as a viable alternative.
However, for many, the logistics of purchasing and securely storing physical bars of precious metals are impractical. As a solution, investing in precious metal individual retirement accounts (IRAs) has become an attractive option.
Keep reading to discover how this investment strategy can safeguard your financial future.
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Precious metals are considered to be a relatively safe investment option because of their resistance to inflationary pressures and ability to retain long-term value with sustained growth.
While you can't hold precious metals in a regular IRA, there are specially designed IRAs that specifically hold precious metals and can be used as a retirement savings vehicle. Here's some information about a precious metals IRA custodian to keep in mind when you're trying to determine which company to use.
What Is a Precious Metals IRA?
Unlike conventional IRAs, which do not allow investors to hold alternative investments, precious metals IRAs are self-directed retirement accounts that do allow investors to hold precious metals, including silver, palladium, gold, and others.
Precious metals IRAs are managed by custodians, but investors are allowed to choose the metals in which they want to invest.
Beyond this difference in the ability to invest in precious metals, these IRAs maintain other similarities to conventional IRAs. They are available in forms that allow pre-tax contributions such as traditional IRAs or simplified employee pension (SEP) IRAs as well as those that allow post-tax contributions like Roth IRAs.
They also have the same annual contribution limits as set by the Internal Revenue Service (IRS). For people younger than age 50, the annual contribution limit for a precious metals IRA is $6,500 for 2023. Those who are 50 or older can invest an additional $1,000 per year as catch-up contributions for a total of $7,500 annually.
Understanding Precious Metals IRA Custodians
Precious metals IRA custodians are trusts, banks, or other types of entities that have received approval from the IRS to administer IRAs. The custodian provides investors in precious metals IRAs with the ability to choose alternative investments, including gold, palladium, platinum, or silver. The metals held by the IRA must meet established purity standards.
Today, most precious metals custodians are trust companies. Since trusts aren't banks, precious metals IRA custodians are required to have omnibus accounts with banks. These are accounts that include the assets of numerous clients without divulging their identities to the bank.
An omnibus account allows the custodian to conduct transactions on behalf of individual clients. Since the omnibus account is opened with a bank, each investor enjoys FDIC insurance for up to $250,000.
This has investors asking, "Is a gold IRA FDIC insured?" The answer is no, and that is a good thing because gold has intrinsic value, it has never gone to zero and its value has lasted much longer than any flimsy government program like the FDIC.
Creation and Evolution of IRAs and the Birth of Precious Metals IRAs
Historically, most workers were covered by employer-provided defined-benefit pensions that rewarded employees for the longevity of service. These pensions provided employees with annuities that paid specific amounts during retirement.
Beginning in the 1970s, however, companies started turning away from defined-benefit pensions, leaving many employees without a good way to save for retirement and supplement their Social Security retirement benefits.
In 1974, Congress passed the Employee Retirement Income Security Act (ERISA). Among other things, this law created individual retirement accounts.
Congress's purposes for creating traditional IRAs were twofold:
First, Congress wanted to provide a way for employees who weren't covered by employer-provided retirement plans to have a way to save for retirement through tax-advantaged accounts; and second, Congress wanted to establish IRAs to complement employer-sponsored retirement accounts by providing a mechanism for rolling over assets when people changed jobs or retired.
IRAs have proved popular with investors, and an estimated 25% of U.S. households owned IRAs as of 2019. Originally, IRAs were offered by large banks that restricted the investment choices of IRA investors. However, the IRS only restricted two types of investments from IRAs, including life insurance products and collectibles.
During the early 1990s, trust companies began offering self-directed IRAs to investors, allowing individuals to invest in alternative investments that were disallowed by the conventional IRAs offered by large banks.
In 1997, Congress passed the Taxpayer Relief Act, which allowed for the inclusion of specific types of precious metals in IRAs.
This subsequently led to the development of precious metals IRAs, which are now broadly recognized as safe retirement savings options for investors.
What Precious Metals IRA Custodians Do and Don't Do
Since precious metals IRAs are self-directed, the custodians do not provide investment advice or tax advice. They also don't insure against financial losses or validate the choices made by investors. The role of a precious metals IRA custodian involves performing the following tasks:
How Does an Entity Become a Precious Metals IRA Custodian?
The IRS has established an application procedure for nonbank entities to become IRA custodians. They must first apply using the procedure listed under Section 3.07 of Revenue Procedure 2023-4 and provide evidence that it will comply with the requirements listed in U.S.
Department of the Treasury regulation sections 1.408-2(e)(2) through 1.408-2(e)(8).The entity must file a written application that demonstrates it meets the following qualifications under the IRS's procedure and Treasury regulations:
Precious Metals IRA custodians typically offer the following types of self-directed IRAs:
Traditional IRAs are retirement accounts that allow for pre-tax contributions. This type of IRA provides a way for people to reduce their taxable income. Their savings can grow on a tax-deferred basis until they take distributions.
When people reach age 72, they must begin taking required minimum distributions (RMDs) each year and will be taxed at that time. Traditional IRAs have annual contribution limits of $6,500 for people under age 50 and $7.500 for those age 50 and older in the tax year 2023.
SEP IRAs are accounts that can be opened by self-employed people or partners to save for retirement. Like traditional IRAs, contributions are made on a pre-tax basis. However, SEP IRA gold owners can make higher contributions.
Since a self-employed individual is also an employer, they can contribute the lesser of $66,000 per year or 25% of their compensation each year. SEP IRAs can also be used by business owners for employees instead of 401(k) plans. People with SEP IRAs must begin taking RMDs beginning at age 72.
SIMPLE IRAs are available to small companies with fewer than 100 employees. Businesses might opt for SIMPLE IRAs because they are easier to establish than 401(k) plans. Self-employed people can also open SIMPLE IRAs.
Employees with SIMPLE IRAs can contribute up to $15,500 on a salary reduction basis each year if they are under the age of 50.
For those aged 50 or older, they can also make catch-up contributions of $3,500 per year for a total of $19,000. Employers are required to match the contributions employees make to SIMPLE IRAs up to 3%. Contributions made to a SIMPLE IRA are on a pre-tax basis, so account holders must begin taking RMDs at age 72 and will be taxed at that time.
Roth IRAs are accounts that allow investors to make post-tax contributions. This means that while they won't be able to reduce their taxable incomes at the time they make contributions, investors also won't have to pay taxes at the time they take distributions.
Roth IRAs also do not have required minimum distributions, and people can continue contributing to them well into their golden years or choose not to take distributions from them.
Like traditional IRAs, Roth IRAs have annual contribution limits of $6,500 per year for those under age 50 and $7,500 for those age 50 or older in 2023. However, people must meet income guidelines based on their tax filing status to contribute to Roth IRAs.
Understanding Precious Metals IRA Custodian Fees and Fee Structures
Precious metals IRA custodians might charge the following types of fees:
Some have minimum account balance requirements to open accounts, while others do not.
Annual storage fees might be charged as flat fees or on a scale based on the balance held in the account. In general, investors should opt for custodians with flat fees since doing so will be less costly as their account balances increase.
Types of Precious Metals That Can Be Included in an IRA
Precious metals IRAs allow investors to include gold, palladium, silver, and platinum investments.
The metals must meet the following purity standards:
Where Are Precious Metals in an IRA Stored?
Investors are not allowed to store precious metals purchased through their IRAs at their homes. Instead, they must be stored by an approved depository. Multiple depositories have IRS approval. A precious metals IRA custodian can recommend a depository to investors, or they can choose one themselves.
Steps to Open a Self-Directed Precious Metals IRA
Investors who want to open self-directed precious metals IRAs can do so by taking the following steps:
1. Choose a precious metals IRA custodian - These are approved self-directed IRA custodians that allow investors to invest in precious metals in their IRAs.
2. Choose a dealer in precious metals - The dealer in precious metals will be where the custodian purchases precious metals for your IRA investments. Your custodian might also have established relationships with specific dealers, but you should make sure your dealer belongs to recognized industry trade groups.
3. Choose the specific products to purchase - Your dealer can help you choose products such as gold bars, bullion, coins, and others.
4. Pick a depository to store your precious metals - There are a variety of depositories available to hold precious metals. You can't store precious metals held by your IRA in your home. Depositories must meet the requirements under the Internal Revenue Code. The precious metals IRA custodian can recommend one to you, or you can choose your own.
5. Purchase the precious metals - Once you have selected an IRA custodian, dealer, and depository, you can complete your purchase. The dealer will then transfer your precious metals to your selected depository.
Precious metals IRAs are alternative options for investors. They might be popular choices when economic conditions are uncertain or when inflation rises. Precious metals IRAs might provide a safe way to grow investments and protect value over the long term.
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